The WasteWatcher: The Staff Blog of Citizens Against Government Waste

IRS’ Litany of Mismanagement

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


The IRS is in full crisis mode and the staff of Treasury Inspector General for Tax Administration (TIGTA) J. Russell George has been busier than a one-legged man in a butt kickin’ contest. 

A steady stream of embarrassing and outrageous revelations have fostered an almost circus-like aura around the agency as it becomes the focal point of a sultry summer of scandals in the nation’s capital and fodder for comedians.  The agency’s missteps have also badly shaken taxpayers’ confidence at a critical juncture, when key statutorily-mandated deliverables related to the implementation of the deeply unpopular and structurally troubled Patient Protection and Affordable Care Act (PPACA) are slated to go into effect.  The parade of horribles has resulted in calls by House Republicans for an immediate $3 billion, or 24 percent, reduction in the agency’s budget.

 Much has been written about TIGTA’s stunning revelation that early in 2010, the IRS began targeting politically conservative organizations that were applying for tax-exempt status for additional scrutiny based upon inappropriate criteria.  TIGTA specified in a June 26, 2013 letter to House Ways and Means Committee Ranking Member Sander Levin (D-Mich.) that 100 percent of groups with titles including the terms “Tea Party,”  “9/12,” or “Patriot” were flagged for further scrutiny, compared to only 30 percent of groups using “progressive” in their titles.  The TIGTA audit also found that after being notified that these practices may be unacceptable, IRS management did not attempt to correct them for almost two years. 

A June 20, 2013 TIGTA report on misuse of SmartPay purchase cards hasn’t helped the agency’s image either.  Enacted in the late 1980s, SmartPay is used by procurement officials throughout the federal government to streamline the acquisition process and improve efficiency.  TIGTA identified significant weaknesses in the IRS’ oversight of SmartPay in August of 2011 and reiterated its concerns in the June 20, 2013 report:   

“While some controls are working as intended, the IRS purchase card program lacks consistent oversight to identify and address inappropriate use. TIGTA determined that the IRS does not have a policy in place to timely cancel purchase cards prior to employee separation. Of the 387 cards associated with employees who separated during our audit period, 98 percent were not closed prior to employee departure. TIGTA believes this could leave the IRS vulnerable to misuse. In addition, the IRS did not have sufficient guidance to define what qualifies as a split purchase for office supplies, which contributed to cardholders splitting purchases. Further, the controls the IRS currently has in place do not include a review specifically designed to detect personal use.

“The majority of IRS cardholders appear to use their purchase cards properly. However, TIGTA identified some instances of inappropriate use that include improper decorative and give-away items for managers’ meetings and Combined Federal Campaign (CFC) fundraising events. In addition, IRS representatives, who were entertaining foreign officials, used purchase cards to pay for multiple lunches, dinners, and related alcohol purchases. For example, one dinner had an approximate cost of $140 per guest and another lunch cost $100 per guest. TIGTA did not find any Department of the Treasury or IRS criteria to assess the reasonableness of these charges, but TIGTA considers the costs related to this entertainment to be high.”

Questionable purchases included a popcorn machine and other game rentals, give-away prizes such as sports balls, bandanas, plush animals, sunglasses, and Stove Top Hats ($3,152); novelty decorations such as kazoos, bathtub toy boats, and Thomas the Tank Engine rubber wristbands for managers’ meetings ($418); and Nerf footballs purchased to facilitate a team-building exercise but never used ($119).  Two IRS workers had used the cards for purchases from online porn sites even though they had reported the cards stolen.

What should be more disturbing to taxpayers than the expenditures is the attitude of IRS officials.  When confronted by the IG about the purchases, the IRS claimed they were entirely appropriate.  According to the report, “We [OIG] identified almost $4,000 in improper decorative and give-away items that were approved through the required IRS process. When these improper transactions were presented to IRS management, they did not concur with our assessment that these items were inappropriate…When we presented to the IRS the instances of improper purchases we identified, it held that Federal law supports purchases for training, decorative items, and use of appropriated funds to support CFC expenditures; however, our review of the applicable authorities determined that these items were improper.” 

A May 31, 2013 TIGTA report detailed the wasteful use of taxpayer money for more than 200 IRS conferences over two years.  One conference in Anaheim, California alone cost taxpayers more than $4 million.  TIGTA reported that a video shown at that conference involving employees dancing and the production of a Star Trek parody video cost taxpayers $50,187.

On July 9, 2013, the National Journal reported that the agency had mistakenly published sensitive information related to groups designated as Section 527 nonprofit political groups.  Groups with that tax designation are predominantly political advocacy organizations.  An organization called Public.Resource.org, founded by self-described public domain and government transparency advocate Carl Malamud and funded in part by Google, was collecting bulk data from the IRS for dissemination to the public, discovered the screw-up, and alerted the IRS. 

On the same day, Acting IRS Commissioner Danny Werfel announced that he would be eliminating employee bonuses at the agency, saying “In this unprecedented budget situation, I do not believe the IRS should pay performance awards this year to employees, managers or executives.”  He claimed the move was not related to agency performance or the work product of IRS employees.  Instead, nixing the bonuses would, according to Werfel, allow the agency to skip the two furlough days it had scheduled for the summer to comply with cost-cutting sequestration requirements.  In FY 2011, one of the IRS bonus programs gave awards totaling of $86.6 million to 55,643 employees; the average award was $1,557.  Werfel stated that he had canceled bonuses for managers and intended to cancel them for senior officials, but that he was still in talks with the National Treasury Employees Union to eliminate bonuses for the IRS’ unionized workers.

While the agency’s more salacious and embarrassing gaffes tend to grab headlines, the agency is facing very serious challenges in its core mission.

Stolen identity tax refund fraud has also been a rapidly growing problem for the IRS, with cases increasing from 51,700 in 2008 to more than one million in 2011.  According to May 8, 2013 testimony by J. Russell George before the Senate Committee on Appropriations, ending tax refund fraud is a top agency priority and IRS officials claimed to have stopped almost $170 million in fraudulent claims on more than 30,000 tax returns in 2012.  The agency has testified that more than 3,000 employees have been assigned to work on identity theft prevention for 2012, and that special anti-fraud filters have been instituted, along with ramped up employee training in identity theft detection.

The Government Accountability Office (GAO) has produced numerous studies on the IRS’ struggle to deter tax refund fraud.   A June 3, 2013 GAO report identified mismanagement of risk and inefficiencies in the IRS’ handling of identity theft through tax fraud.  It took more than a year on average for taxpayers to find out that there were inconsistencies in their tax filing in 2010.  This is likely due to the IRS’ practice of issuing tax refunds to individuals before it receives information returns from their employers, which are tax reports filed by businesses for the purpose of checking the validity of tax claims.  These conflicting objectives have caused the IRS to provide refunds quickly before ensuring accuracy and preventing tax refund fraud. 

In an August 2, 2013 hearing before the before the House Oversight and Government Reform Subcommittee on Government Operations entitled “Refund-Related Identity Theft,” Commissioner Werfel confirmed that the incidents of identity theft-related tax refund fraud continue to rise; as of June 29, 2013, there had been 1.9 million incidents identified, up from 1 million for the 2011 filing season.  During the hearing, TIGTA Acting Deputy Inspector General for Audit Michael E. McKenney told the subcommittee that “…the total impact of identity theft on tax administration is significantly greater than the amount the IRS detects and prevents, and the IRS is not providing effective assistance to taxpayers who report that they have been victims of identity theft.  Although the IRS is continuing to make changes to its processes to increase its ability to detect, prevent, and track fraudulent tax returns and improve assistance to victims of identity theft, there is still work that needs to be done.”

The issue has become so pandemic that entire websites have been devoted to helping the victims, such as http://hackedbyturbotax.com/, which serves as a social network for victims, and Committee for Efficient Government, which aims to become a nationwide clearinghouse for information on the problem and has posted a series of letters from members of Congress to the IRS demanding immediate corrective action.     

The IRS and some members of Congress claim that the agency simply doesn’t have the resources to prevent this surge in identity theft related to tax refund fraud.  The IRS made a request for a budget increase in FY 2014 during a May 8, 2013 hearing before the Senate Committee of Appropriations.

However, on top of the targeting of conservative groups and the skyrocketing incidence of stolen identity refund fraud, other examples of wasteful spending and mismanagement provide more reasons to reject the IRS’ call for more taxpayer money.

For example, TIGTA reported in February 2013 that the estimated value of improper tax refunds issued related to just one program, the Earned Income Tax Credit Program (EITC), was between $11.6 billion and $13.6 billion for 2012, which is more than 20 percent of EITC returns, or twice the limit of 10 percent put in place by the 2010 Improper Payments and Elimination Recovery Act.  The IRS also failed to comply with the 10 percent limit required in 2011. 

 Multiple TIGTA reports had uncovered rampant fraud related to the issuance of Individual Taxpayer Identification Numbers (ITINs).  The program was created in 1996 for those who are not eligible to be assigned a Social Security Number (SSN) but who must still file taxes.  The IRS is required by law to ensure that everyone who earns income in the United States, even those who are here unlawfully or whose income is obtained illegally, pays the proper amount of income taxes.  Fraud related to the misuse of ITINs is not a new phenomenon; it is another in a long list of examples of perverse institutional incentives, lack of oversight, and chronic mismanagement that continues to go unremediated.      

A July 16, 2012 TIGTA audit raised serious concerns about the IRS’ mismanagement of ITINs, stating that “…IRS management has not established adequate internal controls to detect and prevent the assignment of an ITIN to individuals submitting questionable applications.  A lack of adequate controls over the processing of ITIN applications can result in the improper assignment of ITINs to individuals who have not substantiated their identity or foreign status, which can result in fraudulent tax returns.  Controls are important because of the volume of returns processed.  In Processing Year 2011, the IRS processed more than 2.9 million ITIN tax returns resulting in tax refunds of $6.8 billion.” 

Furthermore, and even more alarming for taxpayers, “IRS management has indicated that no function of the IRS, including Criminal Investigation and the Accounts Management Taxpayer Assurance Program, is interested in dealing with ITIN application fraud.  In the meantime, there is a potential that erroneous tax refunds are going to non-qualifying individuals, allowing them to defraud the Federal Government of billions of dollars.”

The July 2012 report also stated that “…IRS management still has not developed organizational processes and procedures to work potential fraud schemes. Moreover, actions have not been taken to analyze information from previously processed ITIN applications to identify indicators of questionable applications that could be used to proactively identify similar applications during processing.”

Some improvements were made in the wake of the July 2012 report as the number of applications flagged by the IRS as suspicious rose from 226,011 for the period July through December 2011 to 340,659 for the same period in 2012.  However, a May 2, 2013 TIGTA follow-up report found that the fragmented internal system for determining organization responsibilities for tracking the ITIN fraud persisted, and that the agency still isn’t using some of the data mining tools it already has to proactively identify potential patterns of fraud which would enable the agency to stop it at the agency’s portals, stating that “…to date, no processes and/or procedures have been implemented to assign organizational responsibilities for working the ITIN application fraud schemes. The IRS noted that the identification of specific functional responsibility for working fraud schemes is needed and that it is working towards developing cross-coordinated processes and procedures.”

For example, some of the data that the IRS currently collects and maintains could assist in recognizing when multiple ITINs are being assigned to individuals at the same address, which is a routine red flag for fraud.  The losses associated with this type of scam are eye-popping.  In tax year 2011, one address in Atlanta, Georgia received 23,994 refunds for unauthorized persons, totaling $46 million.  

But, according to the May 2013 audit, TIGTA “determined that management created an environment that discouraged tax examiners from identifying questionable ITIN applications.  Although the IRS stated that the mission of the ITIN Program was to ensure that ITINs are issued timely to only qualifying individuals, IRS management’s primary focus was on quickly processing the applications rather than on (italics included in the original) ensuring ITINs were issued only to qualifying individuals.  Tax examiners were expected to review approximately seven ITIN applications per hour (an average of 8.5 minutes per application).  The average review minutes per application was based on review times for the prior four quarters and did not include the additional time that a diligent tax examiner needed to evaluate and document questionable applications for referral.” 

In fact, tax examiners were penalized if, acting out of an abundance of caution, they identified for further scrutiny a suspicious application which was later found to be legitimate.  Such errors were being charged against an examiner’s performance review.  For the moment, IRS management claims to have dropped the quality controls which give priority to speed over accuracy, but many of the examiners interviewed by TIGTA expressed concern that those perverse incentives would quickly be reinstated. 

There is no resource problem; there is a cultural problem at the IRS, where management is focusing on the wrong activities.   

The IRS is besieged from without by numerous illicit rip-off schemes and aggressive attempts to breach its security, invade taxpayer privacy, and hack into data management systems.  From within, it has apparently allowed rank politicization to drive and rationalize its activities, and perverse incentives and abusive financial practices to take hold and go uncorrected for years.  The agency has unrepentantly tolerated and, in some cases, provided incentives for its employees to mismanage the resources it already has.  It has wasted millions of taxpayer dollars that could have been put to better use tightening up the well-documented vulnerability of its systems, exercising rigorous oversight over its internal activities and practices, and driving out fraudsters and con artists who are plundering taxpayers for tens of billions every year.  Its management infrastructure cannot continue to put a premium on haste and expect to preserve accuracy, enhance program integrity, or rein in billions in improper payments. 

Whereas additional resources might very well be required to address the onslaught of external assaults and the additional impositions of onerous and crushing new laws (such as the beleaguered and ill-conceived Affordable Care Act), taxpayers are clearly not in the mood to allow Congress to appropriate any more money to an agency that so blithely and unapologetically wastes so much of what it already has with impunity.    

Unless agency officials take dramatic and measureable steps toward revolutionizing the agency’s performance and incentives, reforming the bureaucratic culture, and avoiding the epidemic of self-inflicted wounds and poor judgment it has amply demonstrated lately, it can expect to be under increased scrutiny for a long time to come.  As Joint Economic Committee Chairman Kevin Brady (R-Texas) succinctly stated, “I can’t think of a federal agency in a weaker position than the IRS.  The IRS should resign itself to not getting more money.”

-Casey Pifer and Leslie Paige

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